In what could represent a significant switch for stock buyback programs, KeyCorp executives suggested last week that if its stock price rises much higher the bank may slow or halt its share buyback program.
According to analysts who attended a meeting of KeyCorp executives and investors on Sept. 17 in Cleveland, bank executives said other uses of capital might have to be considered if the bank's stock reaches $48. The proposal was "not well received," said Lawrence Vitale, an analyst at Bear, Stearns & Co.
KeyCorp shares closed at $43.75 Tuesday.
KeyCorp's suggestion comes when many banks have been delighting investors by aggressively buying back shares. But KeyCorp is not alone in reconsidering a buyback because of increasing share price.
A spokesman at Mellon Bank Corp. said the Pittsburgh-based bank would consider slowing a buyback program it started in May if its stock - which closed at $58.625 - rises further. He would not specify the threshold.
Banks buy back stock because it is an easy way to boost earnings per share. It's also a popular way to use capital at a time when the banking industry is posting record earnings and have few new venues in which to lend newfound cash.
"Share buybacks are one of the themes of the year," said Lehman Brothers analyst Michael Mayo, who said banks with aggressive share buyback programs have performed better than other bank stocks.
According to SNL Securities, a Charlottesville, Va.-based research group, 105 banks have instigated or expanded share buyback programs since Jan. 1.
Investors have come to expect buybacks when banks prosper, Mr. Mayo said. The reason, he said, is simple: They don't trust banks to enhance the value of their stocks through other means.
"Many investors have not developed trust in the industry that banks can adequately redeploy capital," Mr. Mayo said. "While that is unfair, investors have been giving most of the credit to banks that buy back stock."
Mr. Mayo said other banks - such as Barnett Banks Inc. and SunTrust Banks Inc. - don't consider their current prices to be a reason to "reconsider" their buyback programs.
KeyCorp has made no decision about buybacks.
"Our stock buyback is a very important part of our capital management strategy," a spokesman said. "We expect to do as much of the buyback as the markets and other economic factors will allow."
KeyCorp officials told analysts last week that they would listen to the investment community and consider its response to changing the buyback. But there's no question about what investors think.
"If you took a vote of investors who were at the meeting it would have been lopsided against stopping the repurchase," Mr. Mayo said. "Lopsided."
